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Financial Overhaul Passes Key Senate Hurdle

Source: WSJ

Posted on 15 Jul 2010

Sweeping financial-overhaul legislation cleared its final procedural hurdle on the way to President Barack Obama's desk Thursday, setting the stage for the Senate to give its final approval to the measure later Thursday.

The Senate voted 60-to-38 to end debate on the wide-ranging legislation, a move that required 60 votes to succeed. The Senate has another procedural vote, scheduled for 2 p.m., to resolve Republicans' budget objections, and then final passage is expected after that point. The final vote will require only a simple majority to pass the bill. Mr. Obama has said he hopes to sign the legislation into law next week.

The successful procedural vote on the "conference" report negotiated between House and Senate lawmakers brings the Obama administration just inches away from scoring a major domestic policy victory.

The measure will touch all areas of the financial markets, affecting how consumers obtain credit cards and mortgages, dictating how the government dismantles failing financial firms, and directing federal regulators' focus on potential flashpoints in the economy.

But the work on the far-reaching rewrite of the nation's financial rules will hardly be over when Mr. Obama signs it into law. The legislation gives financial regulators significant discretion to shape the rules implementing the legislation. That rulemaking process will determine how the new law affects those ranging from traders of complicated derivatives to consumers shopping for a mortgage or a credit card.

All told, the bill directs regulators to write 533 rules, according to an analysis by the U.S. Chamber of Commerce. By contrast, the 2002 Sarbanes-Oxley accounting law mandated 16 rule-makings.

Thomas Deas, vice president and treasurer of the big chemical maker FMC Corp., called the rule-writing phase "round two" of the business community's engagement on the legislation.

"It's going to be every bit as important to how this thing works for treasurers around the country as were the arguments we were trying to make before the bill was passed," said Mr. Deas, who has been active throughout the process as part of the group of corporate derivatives "end users," referring to the implementation of the derivatives provisions.

Key sticking points on the legislation over the months of negotiations include how exotic derivatives products should be regulated, what limits to place on banks' ability to use their own capital to invest alongside client funds, and how to appropriately restrain undue risk. All of those issues were addressed through a series of delicately crafted compromises that culminated in a 20-plus hour negotiating session late last week.

Lawmakers eventually endorsed requiring banks to split off a portion of their lucrative swaps desks, and limited their ability to make investments in hedge and private-equity funds. They also would for the first time give federal regulators the ability to seize and break up large financial services firms that pose a risk to the larger economy, or are teetering on the verge of collapse.

The broader legislation also takes on consumer issues, including a key Obama administration proposal to create an agency tasked with policing most financial products sold to consumers. The agency would be placed within the Federal Reserve but would be effectively independent, able to write and enforce its own rules. Additionally, the legislation sets broad new rules for mortgage lending aimed at preventing abuses that helped contribute to the housing collapse.

Lawmakers also want federal regulators to change the way they assess and respond to systemic risks to the economy. The legislation would empower the Fed to supervise the large, most complex financial firms, and couples that with the creation of a Financial Stability Oversight Council made up of federal financial regulators.

In the final hours leading up to the vote, Senate Republicans charged the bill would send jobs overseas because of overregulation. They also said it would hurt small businesses while not dealing with the fundamental problems of the economy.

"This legislation will enable regulators to impose restrictions on businesses that had absolutely nothing to do with the financial crisis," Mr. Chambliss said on the Senate floor.

The bill is getting mixed reviews from economists following the process, with some comments echoing the complaints of congressional Republicans. "The bill contains good, bad and ugly elements, but regrettably leaves out essential elements of reform," said Michael Boskin, a senior fellow at the conservative Hoover Institution.

Mr. Boskin, who was chairman of the Council of Economic Advisors under President George H.W. Bush, said the bill doesn't include an "endgame" for the housing finance giants Fannie Mae and Freddie Mac.

Deputy Treasury Secretary Neal Wolin acknowledged the difficulties in the housing finance system in a speech Thursday. "Designing and implementing practical solutions to the problems in the housing finance system will not be simple--particularly at this moment," Mr. Wolin told the Securities Industry and Financial Markets Association. The administration already has begun its overhaul of the housing finance system, proceeding in the same way it approached the financial bill, he said.

Senate Banking Committee Chairman Christopher Dodd (D., Conn.), a key architect of the legislation, admitted that the measure isn't perfect. But he said it gives regulators the tools to try to stop another financial crisis from occurring.

"I can't legislate integrity. I can't legislate wisdom, I can't legislate passion or competency," Mr. Dodd said on the Senate floor. "I regret that we cannot give you your job back. ...I can merely create the opportunity for that kind of protection to occur, to modernize the financial system."